There is a pressing need in the United States for an institutional loan product to finance private sector “bulk” purchases of foreclosed single-family homes for use as rental properties, according to lending industry representatives speaking on a multifamily finance panel at the Urban Land Institute’s recent 2011 Fall Meeting and Urban Land Expo in Los Angeles.
With mortgage foreclosures increasing as a result of the housing market collapse, and the number of renters on the rise, “it is critically important” that a financing tool be developed to help expedite private acquisition of the properties so they can be placed back into the market as rentals, reducing the neighborhood blight and home deterioration that often accompany long periods of vacancies, panelists said.
“Everyone gets it—homeownership rates are going down. We’ve got to figure out how to [readily] convert the single-family housing stock to rentals. It is critically important to provide institutional capital for single-family rentals,” said David Brickman, vice president of capital and portfolio management at Freddie Mac. A product that would finance purchases of multiple single-family homes would likely be similar in terms to the financing now available for multifamily projects, he said.
The Obama administration is currently holding discussions with lenders regarding the types of programs that can be created, panelists said. With single-family homes now constituting 40 percent of the rental properties in the United States, “clearly, the sentiment is that something needs to be done, that there needs to be institutional capital in that space,” said David M. Durning, senior managing director for Prudential Mortgage Capital.
While Fannie Mae and Freddie Mac continue to provide most of the financing available for multifamily properties, life insurance companies are emerging as one of the few other sources for funding. However, fears of the economy slipping back into a recession—and the continued weak employment outlook—have kept life insurance companies focused mainly on Class A properties in primary markets, Durning said. “People still have to have jobs to pay rent,” he said. “We [life insurance companies] have tended to stay at the upper tiers, for both markets and properties.”
“What we want to do is make loans that are profitable and consistent with our mission,” Brickman said. “We view private capital in the multifamily space as a statement that we are not doing anything irresponsible. . . . Our focus is on the best execution so we will have a future in whatever comes out of housing reform.”
In today’s lending environment, the purpose of government-sponsored enterprises is “to be there, day in and day out,” said Heidi McKibben, vice president of multifamily customer management at Fannie Mae. “We want to see life insurance companies in the multifamily market as an alternative source of financing. . . . But as they retrench [when the economy slides], Fannie and Freddie are there to provide stability and keep interest rates low.”
According to McKibben, Fannie Mae’s multifamily lending philosophy is simple: “We want to do business with borrowers who pay us back, who take care of their properties, who keep them in good condition—borrowers who are providing places where tenants want to live.”